I followed the steps in this guide http://wiki.squid-cache.org/ConfigExamples/Intercept/LinuxDnatand it works as I wish. Websites with entries in /etc/hosts are forwarded fine, however with -d 9 supplied to ./squid I get:
WARNING: transparent proxying not supported.I'm initially thinking of ignoring this warning as everything appears to be working fine.
Can anyone think why I should'nt ignore this? Many thanks for everyone's help do far.